Conversations Clients Want The Most, Part 2 – Estate Planning

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Conversations Clients Want The Most, Part 2 – Estate Planning

Financial Planning  |  September 25, 2018  |  
Ryan Halls

Situation: Estate Planning in the New Tax Environment

One of the most valuable financial planning topics for high net worth individuals is estate planning. Establishing an estate plan can significantly preserve wealth, improve flexibility, and maintain control over what you leave to your heirs and to charity. With Congress passing the Tax Cuts and Jobs Act of 2017, we believe now is an opportune time to either approach estate planning for the first time, or revise an existing plan in order to leave a more impactful legacy.

The most noteworthy change to the tax law was the doubling of the lifetime federal exemption from $5,600,000 per individual to $11,180,000 per individual1. The federal exemption refers collectively to the federal estate, gift, and generation-skipping tax exemptions. Now, over the course of your lifetime, you can make wealth transfers that add up to $11,180,000 (or $22,360,000 for married couples) without any federal taxes.

Unfortunately, these changes are not permanent. The increased exemption is scheduled to expire after December 31, 2025, so it is prudent to act now to take advantage of the higher amount while it lasts.

Objectives:

  • Identify how you are affected by the new tax legislation.
  • Utilize the increased federal exemption to transfer assets out of your estate.
  • Determine which estate planning vehicles allow you to achieve your legacy goals.

Solutions:

1) If your net worth is above the previous federal exemption level ($5,490,000 in 2017), take the opportunity to shift more of your current wealth to your heirs, free of federal transfer taxes.

2) Consider some different trust options:

  • Dynasty trusts allow you to pass your estate down multiple generations without paying generation-skipping taxes.
  • Grantor trusts can freeze the value of your estate by giving you control of the corpus of the assets you contribute while gifting the appreciation.
  • Life insurance trusts transfer wealth out of your estate efficiently while creating a source of liquidity for your heirs to pay the estate tax liabilities.
  • Charitable trusts allow you to leave money for your heirs and a charity and determine the timing of your contribution to both.
  • Some trusts allow you to sell assets into the trust in exchange for a long-term promissory note. This technique can shift future appreciation out of your estate, and the benefit can potentially be increased through a valuation discount.

3) Finally, work with a wealth manager who is able to coordinate with your tax professional and estate attorney. Clear communication between all of your professional advisors is critical to ensuring the successful development and implementation of an estate plan customized to you and your family.

Conclusion:

The new tax law has created a significant opportunity to maximize the amount of assets that can be passed to your heirs and the overall impact you can leave. There are numerous additional strategies to consider when determining the most effective estate plan for you. Consult with a professional, and revise your plan while the tax environment is favorable.

1 After indexing for inflation.


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